Florida fund decided on more risky investments

The Florida agency that manages billions of local tax dollars steadily decreased its safe investments in favor of riskier ones since 2003, an analysis by the Orlando Sentinel shows.

The State Board of Administration essentially stopped buying such bedrock funds as U.S. Treasury bills and other federally backed notes and replaced them with less reliable commercial paper and private debt, some of which was linked to the subprime-mortgage crisis rocking the financial world.

That subprime connection spooked hundreds of local governments - including Fort Lauderdale and Palm Beach County public schools - into pulling billions of dollars from the SBA, sparking an unprecedented run that forced the state to temporarily suspend withdrawals.

The so-called Local Government Investment Pool fell from more than $27 billion to $14 billion in less than a month as cities, counties and other agencies scrambled to protect money they count on to pay their bills.

Money is shifted

An Orlando Sentinel review of the SBA's investment distribution by quarter from 2003 to September found that investments in federally backed funds dropped from 43.1 percent to less than 1 percent. That money was shifted almost entirely into commercial paper and private debt, such as variable-rate notes.

SBA officials say they made the switch because treasuries were paying small returns, while the commercial and private notes were highly rated and considered exceedingly safe. And none of the investors, they said, complained about the returns, at least not until recently.

"People were agreeing with the strategies, with the results," said Rob Smith, an SBA senior investment officer.

The 25-year-old pool reopened its doors late last week, but many governments and agencies remain critical of the way the state invested the money.

"I do believe at some point they made a conscious decision to take on more risk to get a better return," said Leanne Evans, treasurer of the Palm Beach County School District.

Evans withdrew $307 million from the SBA last month because she feared the fund was paying too much interest. That was a sign, she said, the SBA was taking too many chances.

Return jumps

The SBA return went from 1.49 percent on March 31, 2003, to a high of 5.7 percent Sept. 30.

But during most of the previous four-plus years, the return was near that of, or slightly less than, treasuries. During the past two quarters, however, the fund dramatically outperformed federally backed investments, including more than 1.5 percentage points during the period ended Sept. 30. And that higher return set off alarms across the state.

The Public Financial Management Group, which advises numerous agencies throughout Florida, sent an e-mail to clients saying the SBA investments were unusually high and asked for written instructions to continue approving such deposits.

Investors have said repeatedly that their top two priorities for money they turned over to the SBA are safety and liquidity. Return on investment, they said, is a distant third.

The tax dollars local governments send to the SBA typically pay for daily operations such as filling potholes and meeting payroll. Money in the SBA fund earns interest until it is withdrawn to pay bills.

The SBA director, Coleman Stipanovich, resigned last week.

Florida Chief Financial Officer Alex Sink, who oversees the SBA along with Gov. Charlie Crist and Attorney General Bill McCollum, said she did not know enough about the SBA's portfolio to determine whether the investments were too risky.

Generally speaking, Sink said, "more return means more risk. ... Anybody who's getting more return than the benchmark, you have to be asking how they're accomplishing that."

Sink two weeks ago took the lead in hiring a private-investment firm, BlackRock of New York City, to help the SBA sort out its financial difficulties.

The SBA concedes it has nearly $2 billion worth of investments in default or downgraded in value. That money has been placed in an account that cannot be touched for up to a year. SBA officials hope the investments will pay off if left alone.

The remaining $12 billion in money was available for withdrawals if investors did not pull out more than 15 percent of their total deposits, or $2 million, whichever was greater.

About $2 billion was withdrawn in the two days after the account reopened.

Gary Queen, a Tampa private investment consultant, said the state should have been open about where it was putting the money and why.

"It really is a matter of transparency and clarity," said Queen, who added he would have pulled his money if he could not get a clear answer.